New anti-euro party intensifies pressure on Merkel

Commentary: Challenge from right could spoil her coalition

LONDON (MarketWatch) — Intensifying political and economic strains in the euro area are driving German Chancellor Angela Merkel toward increasingly hard-line policies on the single currency, just at the time when many euro advocates are calling for more German flexibility to save Europe from another bout of summer currency jitters.

Sunday saw the formal inauguration in Berlin of Alternative for Germany (AfD), an anti-euro party that intends to contest the Sept. 22 German elections, which says it has more than 7,000 members just a few weeks after its first meeting.

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Bernd Lucke, founder of the "Alternative fuer Deutschland" ("Alternative for Germany") political party.

Led by a softly-spoken 50-year-old economics professor, Bernd Lucke, AfD adds further to the fragmentation of German politics. By challenging the increasingly frayed conventional wisdom that the euro
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has been a success for either Germany or other countries, the party is likely to mount an important challenge to Merkel, even though the German chancellor is well ahead in the polls and easily the most popular politician in the country.

On the financial markets, the main significance of the surge in media interest in the new anti-euro grouping is that it strengthens the hand of Jens Weidmann, the Bundesbank president. Weidmann has constantly advocated a tough line against state bailouts in Europe and opposes the outright monetary transactions (OMT) program unveiled by the European Central Bank in summer 2012 for purchasing bonds of hard-hit countries — a plan that has yet to be put into effect and seems increasingly unlikely ever to be used.

European bond yields have continued to fall in recent weeks in spite of considerable economic uncertainties in Europe, as European markets have been swamped by the effects of heavy-duty quantitative easing in Japan and the U.S.

However, once the U.S. and Japanese operations tail off or meet substantial resistance, it seems only a matter of time before Europe is hit by another bout of tension over the sharp gap in economic performance between creditor and debtor countries.

AfD will be of significant nuisance value before the September poll but seems highly unlikely to gain the 5% of votes necessary to win seats in the Bundestag. All the same, by taking away more votes from the Right than the Left, even if his group wins only 3-4%, Lucke could threaten Merkel’s majority in Parliament. She at present relies on support from her coalition partner, the liberal Free Democratic Party, which may not be strong enough to enter the Bundestag in the fall.

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Professor Michael Stürmer, one of Germany’s best-known historians and a member of the Official Monetary and Financial Institutions advisory board, says in the daily German newspaper Die Welt Monday that Lucke is a “game-spoiler” for Merkel but not a “game-changer.”

Significantly, despite the disarray shown by the Merkel government over the botched Cyprus bailout package last month, her CDU/CSU conservative grouping has moved up to 41% of support in latest opinion polls, an advance that many say is due to her uncompromising insistence that depositors in Cypriot banks rather than European taxpayers put up extra funds for the latest rescue package.

The AfD opposes the euro as the single European currency and has proposed a strategy for its gradual phasing out and replacement either by national currencies or by smaller regional blocs, with the euro possibly remaining in place as a common or parallel currency. There are echoes here of the U.K. Treasury’s celebrated but mistimed “hard ECU” parallel currency plan put forward in 1990 while Europe was making up its mind on the route to monetary union.

Lucke, a full-time economics professor at the University of Hamburg since 1998, is a clear-thinking but sober-sounding father of five devoid of celebrity appeal. His party apparatus appears populated by down-to-earth German people including a fair share of relatively young women — a combination that may add to grassroots attraction in a country that has been suspicious of rabble-rousers since the Second World War.

Lucke’s academic and political background counters the impression that he represents right-wing radicalism. He was a member of Merkel’s CDU for 33 years, was initially relatively favorable to the euro but changed his mind three years ago with the European bailout of Greece. He calls for an end to the various rescue packages for euro members, saying the extremely large declines in real wages demanded by austerity is incompatible with democracy and is dividing Europe. He disagrees with Merkel’s view that ‘if the euro fails, Europe will fail’ saying that the euro could be phased out without any long-term harm to Europe.

Lucke has an undergraduate degree in economics, history and philosophy from the University of Bonn, postgraduate studies in economics from UC Berkeley and the University of Bonn, and a Ph.D. in applied microeconomics at the Free University of Berlin. Lucke’s primary research interests include sovereign default, news-driven business cycles, growth in developing countries, dynamic computable general equilibrium models and applied econometrics.

In coming months, at least on German TV programs, he is due to become a household name.

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